Background: Ceylon was a British colony from 1815 to 1948, when the island gained independence. It was renamed Sri Lanka on becoming a republic in 1972. Almost three decades of civil war ended when the government defeated the rebel Liberation Tigers of Tamil Eelam (Tamil Tigers) in 2009. In 2015 Maithripala Sirisena became president. He leads a "national unity" government comprising the two main parties, the United National Party and the Sri Lanka Freedom Party.

Political structure: Sri Lanka is a parliamentary democracy, but the presidency is the main locus of power. The government made constitutional changes in 2010 that further strengthened the authority of the already-powerful presidency. In April 2015 the government headed by Mr Sirisena passed legislation to reverse some of these changes, including shortening presidential terms from six to five years. The current administration is working on drafting a new constitution that would strengthen parliament by giving it more powers. It hopes to pass the new charter in a national referendum during its term in office, which expires in 2020, something that The Economist Intelligence Unit does not expect it will be able to achieve.

Policy issues: The main economic policy goals are containing the fiscal deficit, bringing down the cost of living, raising wages and promoting development, especially in rural areas. The wide budget shortfall will remain a cause for concern in 2018-22, but the authorities will make progress on reducing the deficit as they implement the IMF programme, which runs until June 2019. The balance-of-payments position remains vulnerable to a sudden drop in remittances or inflows of foreign investment and credit, as well as unexpected spikes in global oil prices. The government has taken several steps to address Tamil grievances but has not made significant progress on devolving more power to the provinces.

Taxation: The government raised the value-added tax (VAT) rate to 15% in November 2016, from 11% previously. It also introduced a capital-gains tax in April 2018. Indirect taxes are the main source of tax revenue, but revenue from direct taxes is likely to rise as the tax net is widened. The top rate of income tax is 24% and the top rate of corporation tax is 40%.

Foreign trade: The trade deficit stood at US$9.6bn in 2017, according to the IMF. Merchandise exports totalled US$11.4bn, while imports stood at US$21bn.